What Are T-Strips?
T-Strips are an interesting investment tool that really is being used in the current economy more and more due to the safety net it provides. The word "STRIPS" is an acronym which stands for "Separate Trading of Registered Interest and Principal Securities." The thing unique about T-Strips is the fact that the coupons may be seperated from the principal of the coupons and traded seperately as zero coupon securities. This is especially important to banks, corporations, and large investors looking for a safe investment.
How It All Began
The advent of the STRIPS program came with the advent of the computer age. In 1985, the zero coupon market exploded in this innovative new way of investment trading using U.S. Treasury securities. The syatem was based on the new abilities of modern technology to maintain a database accessible through the Fed Wire, that made it possible to convert into a series of zeros. Not long after this, the U.S. Treasury made it official by giving each T-Strip the official identification callled the CUSIP number.
Under the STRIP program, a financial institution can present the US Treasury with a standard Treasury note, Treasury Bond or TIPS (Treasury Inflation- protected Security) to be "stripped." The Treasury then breaks or disintegrates the individual flows of cash into separate securities, after which it is returned to the financial institution.
For instance, a 10-year note which is just will be stripped into twenty interest payments, 2 yearly or semi-annually for ten and one principal payment payment due at maturity date. All the twenty interest payments plus the single principal payment are converted to STRIPS, each of them will then become a separate security. The new separate securities are then identified as coupon strips for the interest payments and principal strips for the principal payment. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. There is no practical difference. As a matter of fact, to an investor, there is no distinction between a coupon strip and principal strip, although in reality the Treasury STRIPS are not identical. In the example given, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program mandates that all the disaggregated or "stripped" securities be kept in a book-entry system for easier tracking and transfer efficiency; this is the purpose of the said CUSIP number. Now, all the coupons can be traded and held individually.
Risk-Free Investing Using United States Treastury Strips
A Treasury note with ten years remaining to maturity has a single principal payment which is due at maturity. When notes are set up at twenty interest payments, the payments are made every six month for ten years. It is at this point that each part of the twenty payments becomes a seperate security.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. For this to happen, the licensed financial agent must conmbine the right principal component along with all its unmatured interest components. When the minimum amounts of each component are brought together, the security is considered reconstituted.
STRIPS are more popular when short-term interest rates are low. At these times short term bank rates and reinvesting bond proceeds are not attractive. T- Strips, being zero-coupon securities, do not have reinvestment risk. - 23223
How It All Began
The advent of the STRIPS program came with the advent of the computer age. In 1985, the zero coupon market exploded in this innovative new way of investment trading using U.S. Treasury securities. The syatem was based on the new abilities of modern technology to maintain a database accessible through the Fed Wire, that made it possible to convert into a series of zeros. Not long after this, the U.S. Treasury made it official by giving each T-Strip the official identification callled the CUSIP number.
Under the STRIP program, a financial institution can present the US Treasury with a standard Treasury note, Treasury Bond or TIPS (Treasury Inflation- protected Security) to be "stripped." The Treasury then breaks or disintegrates the individual flows of cash into separate securities, after which it is returned to the financial institution.
For instance, a 10-year note which is just will be stripped into twenty interest payments, 2 yearly or semi-annually for ten and one principal payment payment due at maturity date. All the twenty interest payments plus the single principal payment are converted to STRIPS, each of them will then become a separate security. The new separate securities are then identified as coupon strips for the interest payments and principal strips for the principal payment. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. There is no practical difference. As a matter of fact, to an investor, there is no distinction between a coupon strip and principal strip, although in reality the Treasury STRIPS are not identical. In the example given, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program mandates that all the disaggregated or "stripped" securities be kept in a book-entry system for easier tracking and transfer efficiency; this is the purpose of the said CUSIP number. Now, all the coupons can be traded and held individually.
Risk-Free Investing Using United States Treastury Strips
A Treasury note with ten years remaining to maturity has a single principal payment which is due at maturity. When notes are set up at twenty interest payments, the payments are made every six month for ten years. It is at this point that each part of the twenty payments becomes a seperate security.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. For this to happen, the licensed financial agent must conmbine the right principal component along with all its unmatured interest components. When the minimum amounts of each component are brought together, the security is considered reconstituted.
STRIPS are more popular when short-term interest rates are low. At these times short term bank rates and reinvesting bond proceeds are not attractive. T- Strips, being zero-coupon securities, do not have reinvestment risk. - 23223
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posted by X - Men @ 2:53 AM
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